Introduction
Imagine a new way of doing business inside an organization, with computers and code implementing the rules instead of managers, in a fully decentralized way and using the tech advantages of blockchain like less costs and way more speed to implement governance. That's what DAOs are able to do, but the best way to understand them is to first understand what each word in "Decentralized Autonomous Organization" means.
Let's start with "Organization". Traditional organizations are a collective of people willing to do something together in order to fulfill a common goal. It can be a non-profit focused on charity, it can be a company willing to revolutionize the market... when a group of people gather under a banner in order to pursue an objective, it can be called an organization. There is a caveat here: In DAOs, and in blockchain technology in general, there are no differences between people and machine: This equality is brought by the smart contracts, the code that provides the rules inside a DAO: if you are able to reach the requirements in the code, you can participate in the whole governance model provided by the DAO.
Then we have "Autonomous". As we just saw in the last paragraph, all the rules in a DAO are provided by the smart contracts. Those pieces of code are self-executing, which makes the organization self-governed as well. Once the rules are written, it will have its requirements. Any time an user - it might be a person or a machine - fulfills those requirements, the code will move to the next step, as it was originally programmed for. If it's not in the code, it doesn't exists. This is also the core of all the DAO's advantages and disadvantages, as we'll discuss in a bit more detail later.
And, finally, we have "Decentralized". The whole code that rules the organization is distributed. It doesn't falls under the hood of a single entity, it's not governed by any singular authority or government, it doesn't have a single physical address. This model, backed up by the blockchain technology, is one of DAO's most important features: It allows the organization to be global from the very first moment, and it allows members from all over the world, with no discrimination whatsoever, to have a voice in the decisions.
The world created by the existence of DAOs is fully based on innovation. First of, it leads to a new monetary paradigm, with decentralized, fully autonomous and trustworthy banks and governance models. It also creates a whole new model of products, that are built on top of blockchains and smart contracts, with their own tokens and cryptocurrencies, with their agent's identity protected by cryptography. Considering the currenct paradigm, with data theft and the abdication of all privacy we might have online, this new model leads to a safer way to conduct businesses, commerce and governance, in a private yet transparent and inclusive way.
DAO's advantages...
As already mentioned before, DAOs are an innovative and open model of creating organizations, which is by itself a really good reason to implement them. But let's take a deeper dive into the details of what makes the DAOs so powerful.
The governance tokens given to the members are a way to control the governance inside the DAO. Let's work with an example here: A member of the DAO submits a proposal for voting. Each member who holds a token will get the right to vote according to the number of tokens they have (it can vary depending on the cases), but each vote will have its anonimity and privacy assured. This way, the members are free to democratically vote to the proposals, which decisions will be protected by the smart contracts. No bribery or corruption can take place in such scenario, and even under-pressure blackmail will be avoided. With no central power, it's impossible to influence the governance inside the organization without influencing the majority of its members.
Smart contracts, the leading force behind the curtains, store the rules and processes in code. This automated way is safer than leaving all the management to people. Let's say a company wants to cover an employee's travel expenses. A contract can be created to deliver the money to that employee, instantly. The whole transaction is transparent and auditable, which means it's really easy for everyone to just check how much money was taken from that contract. Even salaries can be paid in this automated way, and a job position that offers X dollars/month will deliver that amount in a indiscriminated way, agnostic to beliefs, race or gender. The equality, transparency and precision that smart contracts bring into the DAO's game is unique, and the praise they get is justified.
This openness and transparency can be observed in the whole structure of a DAO. When multiple parts have no previous reason to trust each other - or when they even don't know each other - the smart contracts ensure a way to coordinate resources in a trustworthy and auditable way. Governance inside a DAO is geography agnostic and censorship-resistant, meaning one can vote for the proposals wherever they are, in a platform that isn't easily censored as some apps and websites that rely on a single IP address. It also rewards contribution, meaning that one can be rewarded once the DAO succeeds, and the more money it gets, the more the contributor will profit from the early-stage investments they made.
...and disadvantages.
But not everything in a DAO is a dream come true. As Uncle Ben once said, "with great power comes great responsibility". Opensource code can lead to easier information-gathering processes from hackers, and also the exposition of the organization's business plan.
With your source code out there in the open, it's easy for any malicious agent to find it and try to exploit it. The famous case about The DAO Hack, where millons of dollars were transfered by using a bug in the originals The DAO smart contracts, really created an impact, forcing Ethereum to be hard forked into Ethereum and Ethereum Classic. For that reason, investments in AppSecurity, Testing and Threat Hunting are necessary, because DAOs usually are connected to a huge amount of stakeholders, and also these stakeholder's money. The code must be really impecable and adamant before the implementation, once blockchain technology doesn't allow edits or deletions, only appends: Once the smart contract is in the blockchain, it's there forever.
Another "problem" with the transparency provided by the opensource nature of DAOs is that your business plan will also be out there for everyone to see and even copy. While many companies up to this day were created based on secrecy of their plans, this new implementation might be a new paradigm shift in how companies create their businesses. Based on the what we can observe from crypto business models, having an opensource business plan is not necessarily a drawback. Most of those business models are based on a virtuous cycle, a network effect that spirals upwards from the moment the company is created.
It happens because of the uniqueness of this model in the corporate world. Let's say you create your DAO with your unique business plan. It allows day one investments from all over the world, because the cryptocurrency is the same everywhere and it won't rely on banks and countries regulations. Someone from across the globe can fund your company minutes after it was deployed on the chain. This way, the number of users and the adoption rises constantly and it will provide a stronger network based on your DAO. It is simple: The more the risk around your model decreases, the more its defensibility rises, making your company way more trustworthy.
Now let's say someone observes how well your company is doing and decides to do exactly the same. They go there, copy your code, and start their business all over again. They will have a whole new network, without as many users and adoption - and, consequentially, less risk - as yours. A newcomer, having to decide between a well-established network and a completely new network, will most likely go for the well-established one, especially when their money is at stake. If your DAO proved to be successful and reliable with time, then you'd have no problem whatsoever to attract new users.
How will DAOs shape the future (and the present!)
An educational organization open for everyone in the world, independent and self-governing? A charity institution free from corruption and funding projects chosen democratically? All these scenarios are possible with DAOs.
Now that you got a gist of how a DAO works, the possibilities are enormous in this field. They can restructure the future, so we can abandon the centralized, trust-dependent model we are based on right now. Let's make an exercise and imagine what problems we can tackle with this new model.
Think about Kickstarter, or any other crowdfunding platform. They usually function like this: Someone goes there and posts a project, its goals and how people can contribute to it. Once the project is funded, all the money goes to the creator of the project, and people must expect that they will use that money correctly. This dependency on trust might be prejudicial, but smart contracts can assure it can be fulfilled with a few lines of code. How would it work? Imagine that, instead of transfering the money to the creator of the project, it transfers it to a pooled investment fund. Then, everytime the manager or the creator wants to use some of that money to buy something, they should provide a proposal, that would be voted by each member in that pool. Only if it's successfully voted and accepted, the money could be transfered to the manager/creator or directly to some other cryptowallet, and the project could advance. This way it would be easier to track the transfers and expenses, and everyone would have a voice in voting for where the money would go.
Now let's think about an University or school. A lot of what happens there is directly influenced by a rector, or even a government, and a most of the money comes from investments from shady sources demanding biased researchs, and no information is truely free. In Brazil, for example, we are dealing with problems like this right now, with the government allocating money meant to be used in research and education somewhere else. In a DAO Model, the decisions where the money would be invested would depend on the teachers and students, and they would vote where they would like to see that money. This is a way to promote a free, unbiased development of information and allocation of money.
In general, DAOs are still growing and there is space out there for all sorts of new ideas. MakerDAO, for example, is leading this movement, and they are also responsible for DAI, a top stablecoin. Aragon, on the other hand, is facilitating people's adoption to this new model, and you can create a simple DAO in minutes using their boilerplate code. The possibilities are enourmous, and the time is right: We just need to educate ourselves better about it to start creating our way into this new paradigm.
Oldest comments (2)
Great post! I really didn't know anything about DAO's before this. I'd recommend adding some tags to make sure more people see it. #blockchain would be a good one!
Hey, thank you! (: I am glad it helped you learn something new today! Gonna add more tags, sure, I totally forgot about them. Thank you for the heads up!